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Why family offices shouldnʼt overlook apartment market

By Antonio Ferré Rangel,
Chairman and CEO, Kingbird Properties

Most family offices are no stranger to real estate holdings. However, many have focused their investments on trophy properties, flagship business offices, or personal residences.

Taking a bigger-picture approach to real estate investment presents a potential win-win for family offices – balancing their portfolios while providing sustained income.

The Business Case for Real Estate Investment

Falling somewhere between stocks and bonds on the risk-versus-return scale, real estate investment in general provides balance to and complements other investment strategies.
Over the past few years, as fixed-income rates have stagnated and interest rates have remained low, this balance has become even more important.

Perhaps more importantly, the real estate sector offers the sought-after combination of current cash flow and appreciation, while hedging against inflation.

Of the classes of real estate investment, multifamily is currently the superior performing asset class. When comparing asset class yields since 2000, the NCREIF apartment capitalization rate is 4.46 percent versus 2.4 percent for the 10-year treasury and 4.28 percent for stocks.

And when comparing rent performance versus other types of real estate, including office, retail, and logistics, apartments have the least downside, were the fastest to recover after the recession and have been consistently positive since.

What Demographic and Economic Trends Mean for Multifamily

Across the country, we’re seeing increasing demand for quality rental housing for middle-income families that are unable, or unwilling, to purchase a home.

Several demographic and macroeconomic trends are driving this demand. For family offices, that makes multifamily a compelling investment. We are particularly interested in the demand from middle-income families, categorized as the workforce housing sub-sector of multifamily investments.

Millennials, Boomers and Gen Z are all part of “Rentership Society.”

Millennials (adults born between 1981 and the late 1990s) face significant barriers to home ownership with unprecedented student loan debt, rising home prices and more rigorous mortgage requirements.

Even though 80 percent of millennial renters would like to purchase a home, the ability to afford one remains an obstacle that could take one or two decades to overcome.

At the same time, Baby Boomers are downsizing and looking for lower maintenance and more flexible living situations.

The number of renters in their early 60s increased by 84 percent between 2006 and 2016, the most of any age group.

Gen Z, the youngest adult generation, may just be entering the rental market, but they’ll be in it for years to come. A recent report showed that Gen Z will spend more on rent in their lifetime than any previous generation.

It’s estimated members of Gen Z will spend an average of $226,000 on rent before ever owning a home.

Apartment demand will remain attractive for the next decade as renter-by-necessity sector is growing.

The repercussions of the housing market collapse from 2007 to 2009 are still being felt a decade later. At least 1.2 million Americans lost their homes during the recession, many of whom have had their ability to finance in the future impacted. Banks also responded to the subprime mortgage crisis by tightening their lending criteria, making it more difficult for some first-time buyers to obtain a mortgage.

Lack of capital for down payments due to debt and lagging wage growth are further hindering American’s ability to buy.

The federal government has removed some incentives for home buying.

Even those who have the income to buy may be holding off thanks to changes in federal tax policy that make home ownership less attractive.

With the deduction for State and Local Taxes capped, some higher income renters are deciding to stay put instead of buying a single-family home in areas with high property taxes.

Looking for Opportunities? Head to Secondary and Tertiary Markets

The multifamily boom has private capital, institutional investors, and banks chasing deals – but most of the attention has been focused on major markets across the country.

Secondary and tertiary markets across the country offer significant demand for multifamily housing, with less competition than coastal gateway cities.

Additionally, while those looking for trophy properties will not find as many in smaller markets, workforce housing investment opportunities are plentiful.

Larger markets attract larger investors because they are more familiar and perceived as less volatile.

Those investors want to stick where they already have relationships and know both the volume and size of deals will be greater, creating opportunity for family offices in demand-rich environments.

So, where should family offices head? Seek out secondary and tertiary markets that have key indicators – strong job creation, small business growth, well-ranked schools, and high quality of life indexes.

Many of these cities are attracting young families or freshly graduated young professionals who have been priced out of cities such as New York and San Francisco.

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